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DBS keeps 'buy' on Hongkong Land despite impending writedown

The Edge Singapore
The Edge Singapore  • 3 min read
DBS keeps 'buy' on Hongkong Land despite impending writedown
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No thanks to the poor sentiment of the mainland property market, Hongkong Land is expected to book a write-down of between US$200 million and US$300 million.

Even so, DBS Group Research, citing its already "unjustifiably low valuation", is keeping its "buy" call on this counter and has even raised its target price to US$4.05 from US$3.98.

"The current valuation is unjustifiably low even allowing for continued office market headwinds in Hong Kong and property impairment in China," state analysts Jeff Yau, Percy Leung and Cherie Wong.

Hongkong Land now trades at a discount of 69% off the RNAV of US$11.1 per share estimated by the DBS analysts.

In their May 24 note, DBS points out that market sentiment in China has continued to deteriorate with lower sales and pricing. 

In 1QFY24 ended March, attributable contracted sales fell 36% y-o-y to US$262 million, which means contracted for the whole of 2024 might be lower than in 2023 with lower selling prices to dent the profit margins. 

See also: Morgan Stanley downgrades Indonesian stocks to underweight

The company is undertaking an "extensive review" of its projects in China and expects with the impairment charge of US$200-300 million which should lead to lower earnings when it reports its 1HFY2024 results.

Next, the company, as a key landlord in Hong Kong, continues to suffer from pressures felt by the office market.

No thanks to new capacity in the Central business district, overall vacancy increased by 0.7 ppts q-o-q to 10.6% in March. 

See also: RHB maintains ‘buy’ on City Developments at lowered target price of $7.30

Yet, Hongkong Land's own vacancy improved slightly to 7.1% in Mar from 7.4% last December. 

DBS notes that the company has concluded the renewal for a number of leases expiring in 2024. In March, just 7% of the portfolio remains subject to expirations towards the end of the year, which implies relatively lower occupancy risk. 

"That said, negative rental reversion continued to work its way through the portfolio which resulted in lower office income," says DBS.

The company's retail tenants in Hong Kong, on the other hand, enjoyed improved sales in the quarter to March, even taking into account slower-than-expected tourist spending recovery. 

"Coupled with mildly positive base rent reversions, retail income should continue to recover," says DBS, noting that vacancy stayed low at 1.8% in March, versus 1.5% in December.  

"The overall performance of luxury malls in Beijing and Macau remained stable," adds DBS.

Hongkong Land's Singapore office portfolio remains the bright spot. Thanks to tight supply and "flight to quality", the company was able to extract higher revised rental rates. 

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This segment's physical and committed vacancy stood low at 2% and 1% respectively in March, similar to December’s 1.9% and 0.9%. 

"Improved income from luxury retail and Singapore office portfolios should offset the shortfall from the Hong Kong office portfolio, pointing to resilient rental income," says DBS.

All in, DBS has lowered its FY2024 earnings for Hongkong Land by 35%.

Nonetheless, the DBS analysts point out that at current levels, Hongkong Land's share price is trading at a 69% discount off its appraised current NAV, which is 1.5 sd below its ten-year average NAV of 49%.

The stock's estimated dividend yield for FY2024 stands at 6.4%, and DBS's target price of US$4.05 is based on a target discount of 63% to the analysts' June 2025 NAV estimate.

DBS notes that the company's new CEO, Michael Smith has come on board in April. Smith was previously with Mapletree Investments, known for its portfolio of separately listed REITs.

"Investors would watch for any fine-tuning of its corporate strategy. Any initiative that unlocks its asset values for shareholders should improve sentiment towards the stock," says DBS.

Hongkong Land shares closed at US$3.39, down 1.74% for the day.


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